Why modular Windows will suck for Microsoft and suck for you

There's a consensus forming that the next version of Windows will be "modular …

Recouping the consumer surplus

For the accountants and economists, selling multiple versions of the same software is a partial solution to the "problem" of the consumer surplus. Instead of selling one version of Windows at one price, two versions are sold—one for home users and one for businesses—for two different prices. As long as there's some minor feature that makes the business version a must-have for businesses but is irrelevant to home users, the corporate buyers will shell out for the pricier software, and the home users can stick with their cheaper home version. This discriminatory pricing allows Microsoft to increase revenues by extracting some of the revenue that would otherwise be "lost" to the consumer surplus.

Windows XP was the first example of this; XP Home and XP Professional were, for most purposes, identical. But XP Home couldn't join a Windows domain and so was unsuited to typical business usage. Vista took this idea further still. Home Premium and Business more or less correspond to the old XP Home and XP Professional, respectively, but Vista also added Home Basic—for the very cheapest, lowest-value systems—and Vista Ultimate for the geeks and technologists who've gotta have every feature of the OS, whether they'll use them or not.

Because Vista has more versions, there is more need for the products to be differentiated to justify the different prices. What's more, because Vista attempts to break relatively uniform markets into smaller groups (XP Home is replaced by Vista Home Basic, Home Premium, and Ultimate, while XP Professional is replaced by both Business and Enterprise), that differentiation became a whole lot harder.

At the moment, the differentiations between the Vista versions are pretty arbitrary. If you pick Home Premium over Home Basic, you get a lot of extra stuff: DVD playback, Media Center, Aero Glass. There's no way to buy only one of those extra features; it's all or nothing. This tends to limit the price differentials between versions. If you have Home Basic and only want a couple of the extra features that Home Premium has, Microsoft still needs to price the Home Premium upgrade so that it's worth your while to pay the extra cash and get the better version. If the pricing gap is too big, only users who want everything that Home Premium has to offer will bother with it.

Modularization of the OS could go a long way to solving this pricing problem. Modularization provides product differentiation in spades. Instead of having to go all the way from Home Basic to Home Premium to get the features you want, what if you could choose to buy, for example, just the DVD support and scheduled backups?

This approach could be quite versatile; perhaps you have Home Basic, but you want the DVD support from Home Premium and the imaging-based backup of Business. At the moment, to get both of those features, you'd have to go all the way for Vista Ultimate, and that's a big price difference. With modular Windows, you could choose just those features and pay a fraction of the price. This is not to say that Microsoft would necessarily allow something this fine-grained, but it's a logical extension of what we have now. In practice, I would expect to see something like a handful of different roles (which would each contain a dozen features, say) that could be purchased and installed independently of each other.

Stepping stone to subscriptions

If these different functional modules were further tied to Live-branded software, they would also be ideally positioned for a subscription model. While people may balk at subscribing to "core" OS features, if Windows Photo Gallery were coupled with online photo hosting and backup, it might be much more palatable. Rather than one-off payments to add a module to Windows, there might instead be a stream of monthly payments.

How far this could be taken is hard to say. There are places where the tie-ins are obvious, but many more where they are less clear-cut, especially given the decades of expectations that have grown around consumer software. Still, one could envisage a future where all the "extra" features (compared to Home Basic) of the Business or Enterprise editions were available for a monthly fee rather than a flat up-front payment, so businesses would buy a very cheap "core" OS and then pay a few bucks each month for domain membership, central management, drive encryption, and so on and so forth.